SECTION 1. PURPOSE

This revenue procedure provides guidance for determining when statistical sampling may be used for purposes of § 199 of the Internal Revenue Code and establishes acceptable statistical sampling methodologies.

2007–23 I.R.B. 1349 June 4, 2007

come in many different sizes, compounds, and packages, X sells over five thousand products, each of which may constitute an item within the meaning of § 1.199–3(d)(1).

X has a separate stock keeping unit (SKU) for each of its products. X ’s computerized sales journal does not identify whether a product sold was manufactured by X in the United States, manufactured by X in Mexico, or manufactured by a non-related entity. However, X ’s sales journal does maintain the SKU number for each product and is capable of determining the gross receipts derived from the sale of each product. X has devised a methodology to determine what portion, if any, of the gross receipts derived from the sale of each SKU qualifies as DPGR. X estimates it needs one staff-day to make this determination for each SKU. Therefore, X would have to spend over five thousand staff-days to make a determination regarding DPGR with respect to all of its sales.

In this case, it would be appropriate for X to use statistical sampling to determine DPGR derived from the sale of each product.

Example 2 . Y domestically manufactures fertilizer. When Y sells its fertilizer to a customer, it does so by entering into a contract wherein Y agrees to apply its fertilizer to the customer’s lawn. The application services provided by Y are not an MPGE activity. Each contract contains variables such as the amount of fertilizer to apply, the frequency of the service, the size of lawn, and specific customer discounts. Each of these variables affects the total contract price.

Y ’s computerized accounting system does not track what portion of its gross receipts is derived from the sale of fertilizer and what portion is derived from services. In 2005, Y had 20,000 separate contracts. Y has determined that there is sufficient information in each contract to separate the fertilizer application services from the sale of fertilizer. However, the time and expense involved in the manual review of 20,000 contracts make this determination impractical. In this case, it would be reasonable for Y to use statistical sampling to determine the DPGR derived from the sale of fertilizer.

Example 3 . PRS provides a broad range of consulting services for dental practices. In addition to its consulting services, PRS develops and licenses specialized software for managing dental records. PRS ’ consulting services are not an MPGE activity, while its development and licensing of software is. In 2005 PRS had 50 customers. PRS can determine the amount of DPGR generated in a particular tax year through a simple review of its contracts. Given the limited number of contracts to be reviewed, pursuant to section 4.02 of this section, there is no compelling reason for PRS ’s use of statistical sampling to determine its DPGR.

Example 4 . Z produces, distributes, and licenses motion pictures and has been doing so since 1930. Z has a collection of over 5,000 films some of which Z produced within the United States and some of which it produced abroad. Z believes that historical records exist with respect to each film in its collection and that by reviewing these records it is possible to determine whether a particular film represents a “qualified film” produced by Z within the meaning of § 199(c)(4)(A)(i)(II) and (c)(6). However, the time and costs involved in obtaining and reviewing such records on an individual film basis are significant. In this case, Z could use statistical sampling to

ness with respect to the construction of real property in the United States.

.05 Section 199(c)(4)(B) excepts from DPGR gross receipts of the taxpayer that are derived from: (i) the sale of food and beverages prepared by the taxpayer at a retail establishment; (ii) the transmission or distribution of utilities; or (iii) the lease, rental, license, sale, exchange, or other disposition of land.

.06 Section 199(c)(5) defines QPP to mean: (A) tangible personal property; (B) any computer software; and (C) any property described in § 168(f)(4) (certain sound recordings).

.07 Section 199(c)(6) defines a qualified film to mean any property described in § 168(f)(3) if not less than 50 percent of the total compensation relating to production of the property is compensation for services performed in the United States by actors, production personnel, directors, and producers. The term does not include property with respect to which records are required to be maintained under 18 U.S.C. § 2257 (generally, films, videotapes, or other matter that depict actual sexually explicit conduct and are produced in whole or in part with materials that have been mailed or shipped in interstate or foreign commerce, or are shipped or transported or are intended for shipment or transportation in interstate or foreign commerce).

.08 Section 199 was added to the Code by section 102 of the American Jobs Creation Act of 2004 (Act) (Public Law 108–357), and amended by section 403(a) of the Gulf Opportunity Zone Act of 2005 (GOZA) (Public Law 109–135), section 514 of the Tax Increase Prevention and Reconciliation Act of 2005 (Public Law 109–222), and section 401 of the Tax Relief and Health Care Act of 2006 (Public Law 109–432). Section 102(e)(1) of the Act, as amended by section 403(a)(19) of GOZA, provides that section 199 shall apply to taxable years beginning after December 31, 2004. Section 102(e)(2) of the Act, as amended by section 403(a)(19) of GOZA, provides that, in determining the deduction under § 199, items arising from a taxable year of a partnership, S corporation, estate, or trust beginning before January 1, 2005, shall not be taken into account for purposes of § 199(d)(1).